Demonopolization of the Economy - Assumptions and practice in the Period 1981 -1983

A C T A U N I V E R S I T A T I S L O D Z I E N S I S FOLIA OECONOMICA 59. 1986

Anna Fornalczyk, Witold Kaaperklewlcz

DEMONOPOLIZATION OF THE SľONOMY - ASSUMPTIONS AND PRACTICE IN THE PERIOD 1981-1983

1_{. Ia the thesis about monopolization of the economy in}

socialism Justified?

The organizational structure1 _{of the Polish economy in the}

late seventies was a result of a long process of concentration of the economic activity /production and services/ and centralization of management. Can it be identified, however, with monopolization of the economy? Theory of the political economy of socialism does not provide an explicit answer to this question*

In the theory of the socialist economy functioning, the problem of monopoly has been dealt with quite extensively.^ While describing the actual situation in the concentrated and centralized economy there was applied a concept of "complete exclusiveness of production of one enterprise". This concept referred also to concentration of production and centraliza-tion of management within the framework of the industrial amalgamation. The term "monopoly" was treated as

a

Another approach to the problem. Interesting ua is identification of concentration of the economic activity and centralization of management with monopolization of the economy.^* It is worth noting here that concentration of production, concerning the sphere of manufacturing, may but does not necessarily haye to be synonymous with a monopoly. This term refers to the sphere of widely understood exchange

/relationships between enterprises and their environment/. In the market economy, the main prerequleite in attempt* made by enterprises to attain a monopolistic position ia their desire to become independent of their envlronemnt and. what Is more, have a poeslbllity of exerting influence on this environment. It can be assumed theoretically, however, that the producer's jgonopoUstlc situation /exclusiveness or predominance of a given product in the entire production/ does not make him conduct a monopolistic policy /cutting production, raising prices, checking progress In innovation activity, and reducing costs of production/. This may result e.g. from monopolistic competition, possibility of a given product's entry Into the market, application of competitive Imports, or legal prohibition of application of monopolistic practicea.

¥et another situation may be assumed here and, namely, the the monopolistic policy does not result from concentration of the economic activity but is a consequence of regionalization of outlets and/or incomplete Information provided for buyers about possibilities and terms of purchasing.

A basic condition for Joint appearance of the monopolistic situation.and monopolistic policy is deciding by the producer- monopollst about» volume and assortment structure of production, mt-thods of manufacturing, sources of procurement Of industrial supplies, directions and prices of selling, and utilization of' realized income. In the system of macromaha- fcement through directives, producers do not have such rights. Hence, the term "monopoly" may seem to be inadequate for description of the effects of concentration of economic activity and centralization of management.

From the formal point of view, we can speak about the state's monopoly in the economy.

Concentration of production /real sphere/ is favourable, however, for formation of groups of interests /branch or sectorial/, which initiate a mechanism of covert bargaining about tasks and resources /regulatory sphere/.^ Effectiveness of this mtchanlam is largely dependent upon production eacluslveness or domination. Producera-monopolists are - as it is assumed in the coamand-type system - independent of the market environment while their exclusive or dominant

production position creates favourable conditions for then to become independent of the environment created by the central planner* This dual autonomy of the prfccJ ^r-monopolist causes that alao in relation to the traditional macromana- gcwit it is advisable]

- to analyze economic process from the viewpoint of causes and effects of monopolistic tendencies,

- to explain principles of operation of monopolies in the traditional macromanagemnt system, which differ in their form and content from principles of their operation in the market economy /exclusively covert and informal character, absence of classical forma of monopolistic competition/. By way of distinguishing between them we propose a namet bureaucratic or administrative monopoly*

Replacement of the traditional macromanagement with a system based on predominance of indirect methods liquidates, in fact, conditions for existence of the administrative monopoly but it also createa conditions for formation of market monopoliea. Thia ia promoted, firat of a U , by a high degree of concentration of the economic activity /monopolistic situation/* Consequently, one of basic assumptions of the reform concerning demonopolization of the economy Is fully Justified. Our interest here is focussed on the assumed and carried out changes in the sector of the state ownership as we proceed from an assumption that organization and principles of activity binding in thia sector are of decisive Importance for the functioning of the entire economy.

2. Reorganization of the economy in practical introduction of the refora

Institutional and organizational changes in the economy were accepted to be the first stage in introduction of the reform in tts assumptions. These changes were to be comprehen-sive i.e. they wer» to encompass all levels in the management structure of the economy*

Legal reflations explicitly defined organizational chao. gee to be performed *t the intermediate level /i.e* of

Indus-trial amalgamations/, and - leaa explicitly - thoae at the level of enterprises. The legal regulation did not aneompaaa the organization and principle* of operation of the central economic admini.tration /if «* omit her« quite formal changea carried out in eid-1981, and consisting in reducing the number of branch ministries from 1 1 to 6/. Experience gained by economic reforms in Kagoalavia and the Hungarian People's Republic shows that changes In organization and principles of operation of the Centre are an important element in the econo-mic reform. This is especially significant as regards liqui-dation of administrative monopolies.

Hopes connected with demonopolization of the economy through decentralization of rights and competences to dividing the existing enterprises, and especially multi-plant enterpri-ses - were not fulfilled. The following cauenterpri-ses were at work here t

. • • • . - • / ' . .

- division of an enterprise requires, in fact, an approval of the workers' council but it is called by the organ which founded the enterprise, and which organizes the preparatory procedure. Quite few efforts »ade in this direction by multi-plant enterprises and industrial com-plexes in the second half of 1 9 8 1 _{did not find approval}

of the founding organs.^ The argument most frequently advanced by them was to avoid excessive deconcentration of produćtion.

- from the point of view of enterprises' interests crea-tion of competicrea-tion represents an undesirable situacrea-tion as it increases the element of risk in thair activity. - all efforts made in this field wre checked the moment

the activity of workers' self-management organs was suspended on 13th December 1981. Later legal regulations concerning their activity and a general aoeio-politykal situation in Poland caused that workers'self-management restricted the range of its interests to internal af-fairs in enterprises.

- all undertakings in the field of reorganization consti-tute one of essential elements in the enterprise's ope-rational strategy. Elaboration of this strategy calls

for relative

predic-ting

enter«

prise

The practice shows that the most rsdleal changes were made at the intermediate level. Liquidation of amalgamations /with the exception of 29/ began as froa 1st January 1962* The Act on State enterprises envisages that enterprises may « la economically Justified -eases - set up their voluntary

associa-tions* Boards of these assodstlons are not superior units la relation to enterprises* In special oases, the Council of Mi-nisters, after consulting an appropriate parllaaentary commis-sion, aay establish obligatory associations for • period not longer than 5 years* In 1961» many enterprises initiated pre-paratory works for establishment of voluntary associations. These works were Interrupted when the martial law waa imposed* Almost all associations were set up in 1962* They were formed without participation of employees' self-management boa dies, whose activity was suspended during this period*

Studies^ on formation sod operation of voluntary and ob-ligatory associations of producers afford the following con-clusions!

«* membership In sasoclstlons la of a common character* Instan-ces when enterprises remain outside aaaoclatlona ere <^ite unique Just like membership in more than one association) - associations - voluntsry and obligatory - ere of branch

cha-racter and they duplicate almost exactly the structures of ,former amalgamation. Exceptions to this principle are few

and far between)

- analysis of formal and actual objectives of their activity shows that entfrprlees trest associations, first of all, as institutions lncressing their bargaining power in contacts with their environment /industrial supplies, buyers, bank, central and locsl economic administration/)

- from the point of view of aonopolistlc trends, there are important such goals of activity ast ensuring raw materisls and materials supplies for associated enterprises /monopso-ny/ and common policy of selling prices and division of sales markets /monopoly/)

- in practice, there were formed various types of associations fro* the point of view of restricting production and econo-mic autonomy of associated enterprises. It should be ad-ded here that it does not always coincide with division into voluntary ana obligatory associations| ' “ organizational form of association and objectives of their

activity result from the following prerequisites» their hasty establishemnt in the first half o f‘ 1 9 8 2 _{with a visible}

intervention of branch ministries and with no participation of self-management organs, application of organizational continuity between liquidated amalgamations and newly-estab-

1 1 _{shed associations of producer /offices of ministries*}

plenipotentiaries for determination of production systems established by employment of managerial cadres from liquida-ted amalgamations/, habits developed by the managerial cadre to operate in a definite economic system, preservation of cen-tral allocations of basic raw materials, materials and a considerable part of hard currency resources, as well as discretionary character of relief granted enterprises in fU nlcial deductions to the state budget /sphere of activation of covert bargains/.

The above results testify that hopbs for a partial demonopolization of the economy through liquidation of amalgamations were not fulfilled. Enterprises, however, should not be blamed for such situation as voluntary associations are to protect interests of enterprises /such was the assumption behind their formation/. Monopolistic associations of enterprises serve Just such objective. It is worth adding that obligatory associations are of branch character as well. The central economic administration, while introducing the reform, does not give a good example of organizational changes. Moreover, associations were formed in the situation characterized with absence of legal regulation protecting the economy against monopolistic tendencies. It should be stated, however, that effectiveness of such regulation may be actually limited if the state's economic policy favours creation of monopolistic situations and practices /bureaucratic or market monopoly/.

3* Economic dll« н и в of antimonopoly policy

Strong *o no p o l lution of narket structures and lack of definite condition* for operation of competitive relations nay efficiently block proeffectiveness mechanisms In the economic refora* Elimination of harmful monopolistic structures is one of prerequisites of proper functioning of the market and launching of s mechanism of competition /envisaged in the draft of th* reform/ aiding directional stipulations of the central plan. Proper functioning of the price system /including, first of all» contractusl prices/, positive influence of the self-financing principle on effectiveness of economic management» protection of enterprises* autonomy in the sphere of wage policy and assortment of production largely depend on the success of efforts aimed st demonopolization of th* economy. Otherwise, it will be difficult to guarantee protection of consumer interests end create strong stimuli for Innovation activity and improvement of production quality*

In discussions on demonopolization of the Polish economy, there is often formulated a question - is it possible at all to launch the mechanism of competition in conditions of deep market disequilibrium? Some economists are very skeptical as regards possibilities of competition in conditions of a huge surplus of demand over supply*® They claim that antitrust legislation will not be able to protect competition in the situation of the seller's market. Competitions means, first of all, rivalry among enterprises consisting in striving to expand outlets for their products. On the other hand, today we have rivalry among buyers seeking sources of purchasing goods.

We should agree with a thesis thst the buyer's market is a basis for effective operation of competition. This is an obvious thesis. The question should be reversed, however, and it should bei will It be possible to restore the market equilibrium without some even modest signs of competition? Empirical observations tend to confirm a conclusion that preservation of monopolistic structure hinders creation of the buyer's market even when productive capacities in a given field equal or even exceed demand.^ Reconstruction of the market is often impossible not for objective reasons /e.g.

deficit of productive capacities/ but for subjective reasons

,

Forailation of a socially and economically rational antimonopoly policy is. a difficult task, and particular elements of this policy are an object of controversial evaluations. This results primarily from the fact that the influence of monopolistic structure on the economy is not uniform in the sense of effectiveness of economic management, interest taken in innovations etc. Hence, it ia of utmost importance to determine possibly precisely the scope of demonopolisation of the economy taking Into account mlnuaes and pluaea of monopolistic structures and their existence« Thia problem may be presented applying concepts of upper and lower limita of demonopolization.

The upper demonopolisation limit la such its scope the suprasslng of which mlgh cause loss of possibilities allowing to promote effectiveness connected with existence of monopolistic structures* Their advantages include, first of all:

- economies of large scale production in its technological aspecti

- economies of large scale in its economic dimension being expressed in high effectiveness of calculations and deciaione in concentrated structures;

- stability of contractual prices In the situation of predominance of oligopsonic structures.

The lower limit of demonopolisation or, in other words, minimum scope of demonopolization is such its scope, which allows to launch a competition mechanism. Enterprises holding their monopolistic position, being not threatened by external preasure, do not show sufficient propensity to technical end organizational innovations, and to introduction of new products into the market.

Relative ease, with tfcich monopolistic units can accomplish their own goals by unilateral determination'of terms of their cooperation with the environment being favourable for the* /prices, assortment/, weakens their interest in rational

utilization of their resources and in changes in the structure of production adjusting it to the structure of buyers' needs*

Areas and Instruments of antlaonopoly policy

4; ■■■'.*

i

S

Among the main activities of economic organizations within the framework of their monopoly policy aret tendencies to formation of monopolistic structure of markets, practices restricting competition, and fixing of prices.

The structure of msrkets is determined Ъу principles of founding, merging, developing, buying out, aplltlng, end liquidating enterprises. It constitutes the most essential and the most effective area of antimonopoly operatlona due tot

- firstly, the fact that In the system of socialist economy, the structure of msrkets constitutes an important area of the state policy) and

- secondly, the fact that control of the structure of markets undermines monopolistic practices.

In the centrally managed economy, effectiveness In fighting monopolies depends mainly on solutions on the macroeconomic scale as an especially strong source of monopo-listic tendencies lies In branch ministries, which through their decisions nsy promote strongly concentrated structures.

The policy of shaping market structures must be bssed on elastic rules reflecting specific features of particular sectors of the economy. Protection of competition, through sppllcstion of s structural approach, should be conducted In these economic branches where existence of concentrated structures csnnot guarantee improvement of effectiveness of economic management /especially in consumer-goods industries/. A. diferent policy should be pursued in these branches and

systems e.g. vertical where a high degree of production concentration is economically Justified. In these areas, it Is reasonable to preserve monopolies and even protect them applying a regulatory approach.

Froa among diverse Instruments of the antimonopoly policy concerning formation of markets structure, we can distinguish command-type instruments and non-command-type /indirect/ inatruments.

CoBMaiuł-type instruments . characteristic for the

Structu-ral approach-encompesa:

- locally guaranteed right of veto of the «tato organ on

projects of merging enterprlaea,

eatabllahlng

new

enterprises, purchasing enterprlaea or forming aftaocla-

tlona of producers!

- legally

guaranteed right of ordering dlvlaion

of

enterprlaea or dlaaolutlon of associations*

Without negating here the Importance of couund-type lnatrumenta in their control of market structure, higher effectiveness should be attributed, however, to oon-eommand- type lnatrumenta* Among these instruments, the moat important role la played by the followings

- struggle for balancing the economy and systematic abandoning of relice of the former system baaed on commands and centralized allocations)

- socialization of control over enterprises consisting in tranafer of rlghta of the founding organ Jn the field of supervision to the supervisory bosr& It would allow for a change of relationships between enterprlaea and their founding organu* which and especially branch ministries, ere a source of monopolistic tendencie*}

- rebuilding of the banking system consisting in ccm- EBRrciaHzstloB of deposit banks and weakening by all m a n « th« monopolistic position of banks in relation to enterprises!

- concellation of various formal constraints in access to particular manufacturing branches and autonomous detaralnation of the object of their activity by enterprises* This principle cannot concern some branches and types of activity requiring protection b y the monopoly law /eg. branches of technical infrastructure/:, - Stimulation of Innovation propensity in operations

of enterprises, especially in the sphere of developing new'producta*

/

Classical symptoms of

_{monopolistic restrictive practices}

sre

market

segmentation* Reatricve

■•rttt without t

full

A basic

of lnatniaenta couniereacting .auch practica»

ara ccaaanda. Among thaw, the aoat important rola la played by

• lagialativa ban of monopollatic agraamanta with regard to

prica-fixing

_{aarket segaentetion, aa well aa agreement*}

Including taraa of aalllng

and

voluaa of production,

creation

to market

_{other economic unita*}

Prohibition

_{encompass big}

enterprises, saaociatlons and other groupings of enterpriaes both voluntary and oblige

tory.

the

past

negative experience provided

by

restrictive

in

an

**•

Analysis of the economic life proves that regulation of enterprise structures and fighting reatrlctive practices not always protect effectively the socisl interest against s h e m f u l activity of monopolies. In certain economic branches controlled, for reeaone Justified by technological and econoaic prerequisites, by monopolies and oligopolies fighting restrictive practices reveals insufficient effectiveness. Hence, it is necessary to reinforce these activities by means of price instruments, or more precisely by intervention, through commands into pricefixing.

A fundamental principle of this intervention is elasticity in applocatiqn of directive pricing settlements determined by the market structure chsracter /full monopoly or oligopoly/. Interference in pricing produces not only positive but elso negative effeats. Control of pricing through commands may lead to loss of their elastic quality and, thus, their ability of balancing market segments. Moreover, due to methodological barriers intervention through commands csnnot solve ihe dilemma

of non«parametric character of prices caused ty monopolization. According to features represented by specific monopolistic systems, there msy be employed different forms of price intervention. In some systems, it Is necessary to employ offioial prices /full monopoly/, while in others /oligopolies/ regulated prices or a combination of official and regulated prices. It is slso advisable to employ In chosen sress controlled by oligopolies price Intervention limited to one or two enterprises, lmmltstlng the mechanism of lesdershlp prices.

In exceptions1 esses, It is possible to spply non-command manipulation of pricing in the form of the so-called ■counterspeculstion’im. a system of the state reserves, pun. chases end ssles by intervention.

The command-type instruments of the antimonopoly policy presented here must obtain a from of legislative regulation equipped with appropriate sanctions Imposed on economic units vlolsting definite prohibitions. Both enterprises, social organisations, end individual citizens should be entitled to seek compensation for losses suffered due to lllegsl monopolistic practices.

Implementation of the antimonopoly policy and enforcement of the sntlmonopoly lew mske It necesssry to estsbllch a special institution equipped with proper powera and enjoying a high socisl prestige. Such conditions would be met, for example, by Antimonopoly Office protected directly by the Parliament, which would appoint a director of thia office. Accordingly, It would be an office Independent of the state administration organs. An argument in favour of this proposition is the feet that the primary mission of the entimonopoly policy becomes prevention of centralized monopolistic trends promoted by branch ministries.

References

1. We propose that e distinction should be Bade between the organizational structure of the economy end its enterprise structure as not every organizational unit is an operating enterprise if it simultaneously does not self-finance its sctivity, does not realize an economic surplus, and does not make economio decisions.

2. Seet J.A. Kronrod, Principles of Political Economy of Socialiaa /in Russian/, "Mysl*, Moscow, 1979, p. 384.

3. We propose to use the term macromansgement to describe methods of the Centre's influence on the remaining elements in the organizational structure of the economy ensuring convergence of their activity with goels of the central plan. Macromanagement fUctions includet central planning, organizing, steering, controlling.

4« This problem is discussed in works of J. Lipiński: Studies from Theory and Practice of Prices /in Polish/, PWE, Warsaw, 1977J Functioning of the Market in the New Economic System

i&

5i B. Gliński, Management of the Socialist Economy. Logie of Progress /in Polish/, PWE, Warsaw 1980, p. 251*

6. S. Jakubowicz, Integration of Manufacturing Units and Monopolistic Trends /in:/ Formation of Organizational Structures in Economic System /in Polish/, 102 i DK, Warsaw,

1981, p. 1 0.

7. A. Rychard, Political Power and Economy. Three Theoretical Prospects /ini/ Democracy and Economy /in Polish/, ed. by W. Morawski, University of Warsaw, Warsaw, 1983, pp. 32-36.

8_{. B. Haus, N. Karać, J.Llchtar, Disintegration of Intermediate}

Organizational Structures in Selected Industrial Branches /in:/ Association of Enterprises in the New Management System /in Polish/, IOZ 1 DK, Warsaw, 1982, p. 33.

9. A. Cylwik, Aims and Forma of Economic Associations /in:/ Association of Enterprises..., op. cit., /in Polish/) B. Miedziriski, Some Truth about Associations /in Polish/, Życie Gospodarcze, No 26, 1983) Anelysis of Introduction of the Economic Reform in Industrial Enterprises /inpolish/. Report on studies, Lodz 1983, Zielona Góra 1984.

Anna Fomalczyk, Witold Kaaperkiewicz

Demonopolizacja gospodarki polskiej - założenia i praktyka w okresie 1981 - 1983

é

В0_{С Г ° Г У Za! t!naWla;Ją e U ł CZy teia} 0 _{“°noPolu » gospodarce}

* etycznej Jeat uzasadniona. Odpowiadając na to twierdz«» rozróżniają Oni poecie monopolu biurokratycznego i monopolu rynkowego. Wdrażanie nowego systenu ekonomicznego prowadzi do likwidacji aonopolu biurokratycznego, ale powoduje powatania monopolu rynkowego. Wskazaniu negatywnych konsekwencji »onopolu towarzyazy wywód o konieczności demonopolizacji goepodarki Dotychczasowa praktyka wdrażania reformy gospodarczej ni# »powodowała jednak odpowiednich zmian inatytucjonalnych i organizacyjnych tworzących warunki dla realizacji tego postulatu. Znaczna c z ^ ć opracowania poświecona jest analizie obszarów i narządzi polityki antymonopolowej.